Find my old posts

You might know the words, but do you get the music?

“Some of the most clever economists I have encountered are actually not formally educated economists. In fact a number of Nobel Prize winners in Economics are not formally educated economists. One of my big heroes David Friedman is not formally educated as an economist, but to me he is certainly an economist – one of the greatest around. Another example is Gordon Tullock who was trained as a lawyer, but he is certainly an economist – in fact to me Gordon Tullock is one of the most clever economists of his generation and it is a complete mystery to me that he has not yet been awarded the Nobel Prize in Economics. The way I perceive people’s skills as economists has nothing to do with their formal education. To me Economics is not an education. Economics is a state of mind.

Therefore, you can easily be an economist without having a formal education as an economist. As a consequence there are also people who have been able to attain a formal title as an economist without reaching that higher state of mind that a real economist has. I have unfortunately also encountered many of this kind of “economists” – economists by title, but not in mind. Many of these people are unfortunately high ranking policy makers.”

For years I have been running around telling people that “Economics is not an education. Economics is a state of mind” and I have always believed that I have come up with a great saying. However, it turned out – as with most of my views – that I in some way got it from Milton Friedman. Over the weekend I was re-reading a couple of chapters in Milton’s and Rose’s memoirs “Two Lucky People”. On page 543 I stumbled on this quote from Milton:

“I have long believed that a feeling for economics is something people are born with rather acquire through education. Many highly intelligent and even highly trained professional economists knows the words but don’t get the music. On the other hand, people with little or no training in economics may have an intuitive feeling for it.”

It be frank I don’t remember ever reading that before, but it is very close to what I said in March. But it is getting even more interesting when you have a look at some comments David Friedman was so kind to make on my post back in March:

“My father’s standard example of your point was Leo Szilard, a physicist who was also at Chicago. Apparently Szilard would come into my father’s office with ideas in economics. Generally they were things economists had worked out much earlier–but they were right….I don’t know of anything my father wrote about Szilard–I’m going by memory, but I’m almost certain I have the right physicist.”

Well David, your father did indeed write about Szilard. This is the footnote (7) to the Milton quote above:

“Another example is my former University of Chicago colleague Leo Szilard, the great physicist and chemist who first discovered the principle of the chain reaction, and indeed, patented it. He was repeatedly reinventing economic theorems, and getting them right”

I think this is a very good example of why I have in my book on Friedman called him a “pragmatic revolutionary”. Friedman makes you think. He so to speak installs a certain way of thinking in your brain once you get exposed to him. It happened to me back in the mid-1980s. Obvious David got the exposure from birth.

12 Comments

Martin

“I have long believed that a feeling for economics is something people are born with rather acquire through education.”

I don’t know about this, but I certainly do agree that economics is a state of mind; once you are taught the basics the only difference between you and a professional economist is practice at application*.

Economics is a beautiful field in a sense that you can (re-)derive all important results from the basics; similarly all important and beautiful results are an unexpected application of basic principles that afterwards looks obvious. Two examples that spring to my mind are:
1. the post you did on the production of money and the overall view of economics;
2. the series of posts by Eagle on Pareto in monetary policy.

*I think that with practice of anything comes intuition even if you’re not born with it, it just requires a certain persistence. This is basically the Gladwell-view in “Outliers”.

Interesting piece from Krugman’s past. I generally don’t think that there is anything wrong in changing your mind. However, fundamentally disagree with Krugman’s analysis of devaluations then and now.

Krugman’s analysis of devaluations is basically what I earlier have called national accounting economics (Remember Y=C+I+G+NX). The young Krugman argues that there is an income/wealth effect of a devaluation, which will reduce private consumption (C) and that that effect might be more negative than the increase in net exports (NX) due to the improvement in competitiveness. Today Krugman is stressing the impact on NX when he is advocating devaluation in for example Latvia.

I have often stressed that this national accounting of devaluations is problematic and I think a monetary analysis of devaluations is much more correct.

In my view an devaluation can always in MV and therefore nominal GDP. However, you can not a priori know whether that also will lead to an increase in REAL GDP.

In the 1970s devaluations had little impact in most countries – for example the Scandinavian countries that did numerous devaluations. The reason for that was that inflation expectations where high and increasing so all the monetary easing swiftly was translated into higher inflation. The problem in the 1970s was not one of lack of demand but rather supply side problems.

In the 1930s devaluations were strongly expansionary exactly because nominal demand was suppressed and expectations were highly deflationary.

So yes, the young Krugman was more right than the older Krugman (even though I don’t think he has changed his mind), but the way he got to that conclusion in my view was wrong.

And yes, today is much more like the 1930s than the 1970s for most European countries so I leave it to you to conclude what I think devaluations can do for European countries today…

“The young Krugman argues that there is an income/wealth effect of a devaluation, which will reduce private consumption (C) and that that effect might be more negative than the increase in net exports (NX) due to the improvement in competitiveness. ”

But if the devaluation is a result of expanding the money supply then shouldn’t that have a positive wealth effect? After all, that’s the channel which operates in the cases where you argue that devaluation is expansionary regardless of the terms of trade.

The answer is yes and no. Yes, in the sense that we see the permanent income as the true measure of wealth. However, imagine that a country has debt denominated in foreign currency – like Greece would have it it were to leave the euro. The a devaluation clearly increases the level of debt and hence decreases net wealth and hence private consumption.